2025 Tariffs and the American Manufacturing Industry

New tariffs are poised to make a significant impact on the American manufacturing industry. Getting as educated as possible on how these tariffs will work is the best way to adapt to them quickly. Here’s CADDi’s FAQ for the emerging situation.

What are tariffs?

Tariffs are additional taxes that companies pay when importing goods into their country. They’re usually placed on specific categories of goods originating from specific countries. The amount is based on the cost of the imported goods. For example, if a company is importing $1 million worth of lumber, if there was a 10% tariff in place, they would need to pay an additional $100,000.

What are the goals of tariffs?

The goals of tariffs are typically to discourage sourcing products from other countries and therefore increase spending on domestic products. This stimulates the domestic economy, creating more jobs, increasing spending, and building demand for new industries and innovation. Tariffs can also be used as a political tool, as is the case with the upcoming 2025 tariffs. A country can implement tariffs that are aimed to damage the economy of the other country, only lifting them on the condition that the other country complies with some other demand.

What are the proposed 2025 tariffs?

The tariffs proposed by the Trump administration in 2025 are an additional 25% rate on a wide variety of goods imported from Canada and Mexico. Currently, the three countries all engage in the North American Free Trade Agreement (NAFTA) that allows for free import of most goods. The 2025 proposed tariffs would be a major deviation from this agreement, with the free trade of gasoline, food, and automotive products being disrupted with additional costs.

What are retaliatory tariffs?

Retaliatory tariffs refer to the practice of a country that’s subject to tariffs retaliating by placing tariffs on the originating country. This can help compensate for the economic damage to the tariffed country. If goods from Country A are tariffed when imported into Country B, but Country B can still freely export goods to Country A, it creates an economic imbalance. The goods originated in Country A may still go unpurchased if cheaper imports from Country B are still available. Retaliatory tariffs try to reclaim economic activity for domestic goods. Canada and Mexico have both signaled an intent to implement retaliatory tariffs if America’s tariffs on them go through. If tariffs and retaliatory tariffs both go through, it could create a trade war.

What are the likely effects of the proposed tariffs on the American manufacturing industry?

A study in 2022 by the National Institute of Standards and Technology found that 20% of the component materials and services for the American manufacturing industry were imported. The top three countries of origin were Canada, China, and Mexico. If the tariffs go through, many of these component materials will become significantly more expensive. Moreover, much of the output products of American manufacturers are sold in Canada and Mexico. Demand for these American products may also decrease as prices increase.

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On the other hand, some manufacturing sub-industries are already working with mostly American materials, and/or selling to mostly American customers. These manufacturers will likely be affected less, and may actually thrive in comparison to more foreign-dependent competition. Also, as more manufacturing and purchasing is onshored back to America, the economic stimulation will hopefully create more purchasing power among American consumers. This could create more demand for American products, possibly counteracting reduced foreign demand and increased production costs.

How do American manufacturers get ahead of costs and challenges of new tariffs?

There’s no one solution for manufacturers to weather the costs of tariffs. Instead, the important thing is becoming informed, flexible, and agile to remain capable of taking advantage of new opportunities. The more informed you are about your current sources of costs and potential alternatives, the more readily apparent the highest priority costs to save become. Flexibility allows you to switch to alternative suppliers and customers without incurring additional costs. And agility allows you to switch to those alternatives quickly, allowing cost savings to happen quicker.

What new technologies can help American manufacturers mitigate the costs of tariffs?

Technological innovation is the key to building a competitive advantage in situations where all manufacturers are incurring the same costs. You can’t hope to negotiate a private agreement with Canada or magically find a domestic supplier cheaper than any your competitors can find. However, you can build a more efficient technological process that makes you more informed, lower costing, and faster than other manufacturers.

There are two major categories of technological innovation that American manufacturers must embrace in the face of tariffs. One is innovating the actual production process with more effective machinery. New innovations in AI robotics, machine vision, and dynamically adaptive settings can push forward more productivity in this category. However, most American manufacturers have already heavily innovated in this category, with future improvements being expensive and highly specialized. When flexibility is important, this sort of specialization can backfire.

On the other hand, the category of information management is underdeveloped in many American manufacturing shops. This refers to technology that manages all the data for your shop that helps you make informed decisions. This covers everything from past purchases, to supplier data, to design data and drawings, to production data, to quality control data, to inventory data, to sales data. This is vital data to understand your options and quickly switch between them. Despite how important organizing and accessing this data is, many shops have stuck with solutions that were implemented in the 1990s. Tremendous innovations have happened since then, which can be a relatively cheap implementation that can make a significant improvement.

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